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March 18, 2005

Prospectus Triple Play

Boston Red Sox, Cincinnati Reds, San Diego Padres

by Jason Karegeannes

Boston Red Sox

  • Mo' Money: The Red Sox have had an interesting challenge in recent years: How do we generate more revenue in an old (but beautiful) stadium? Last year, Doug Pappas noted that Sox tickets were already going for 40% more than anyone else in the league for tickets. Following their World Series win, the Sox again raised ticket prices, by as much as $10 a ticket.

    But raising ticket prices obviously isn't enough, because two years after adding seats atop the Green Monster, the Sox are looking to make more changes. This time around, they're planning to remove the glass from the .406 club behind home plate to make it an open-air club seating area. The renovation would allow the Red Sox to add 800 more seats and sell 200 standing-room tickets. Given that the SROs sell for $20 each and the new seats can be expected to be among the most expensive in the house, this could be a significant chunk of ticket revenue.

    The changes to the .406 club would be coupled with the addition of roughly 2,000 extra seats and standing spaces in the left- and right-field stands. If the proposal passes, the renovated section would open in 2006 and would expand Fenway's capacity from 36,298 to 38,815. While the amount of extra revenue the Red Sox would generate is unknown, the late Doug Pappas estimated that the Green Monster seats would generate an extra $4 to $6 million in revenue. For those keeping track, that's two Wade Millers and a Mark Bellhorn.

    Before we cast this idea aside as another attempt to pick fans' pockets, consider this: Boston has one of the highest per capita incomes among major league cities. The organization also puts a ton of money back into the team, and they do so rather wisely. The organization has found some creative ways to remain profitable while preserving one of baseball's true treasures. Fenway Park, along with Yankee Stadium and Wrigley Field, is one of the game's greatest ties to its past. The changes that have been made have done nothing to change the rich character of Fenway, and the changes to the .406 club won't either.

  • Spring Bling: Along with the changes to Fenway, the Red Sox have found yet another way to increase revenue: spring training. After losing money on spring training in 2002, the team managed to increase revenue by 75% and jump into the black. How? The Boston Globe reports that the Sox only pay $310,000 per year to use the stadium, a figure which leaves the city of Fort Meyers losing about $300,000 a year. City officials claim that the Red Sox bring about $25 million a year into Lee County, which is probably why they paid to expand their spring home.

    In return for their help to the local economy, the Sox don't have to share any ticket, parking, or concession sales with anyone. Not bad when you consider that you could pay as much as $44 to see a meaningless baseball game. All of this provides a tremendous lesson on how teams are able to leverage successful, or in this case historic, seasons to increase their bottom lines. The financial windfall from the 2004 championship run combined with continued strong performance would be enough to allow the Red Sox to maintain one of the highest payroll in baseball for many years to come.

Cincinnati Reds

  • Change at the Top?: Big changes could be in store for the Reds following the recent announcement that three limited partners have put 51.5% of the team up for sale. Current CEO Carl Lindner and Great American Insurance Company own 37% of the team. Lindner also has a clause that will keep him as CEO until he resigns or passes on. The available share of the Reds is expected to go for something between $100 million to $150 million. The team is made more attractive given the annual contributions made by the Yankees in the form of the luxury tax, which has helped several teams stay in the black. Lindner and investment banker William Reik, who owns 11% of the team, will have the right to match any offer on the newly for-sale shares.

    What does it all mean? Not a whole lot right away, but it could have major ramifications for the future of the Reds. No, the Reds are not leaving Cincinnati. Not with a new ballpark and the proverbial 'ironclad' lease. What will be interesting to see is who steps in and buys the team and how much extra money they will bring to the table. Lindner is adamant about keeping ownership Cincinnati-based, but the Reds may benefit from a wad of cash and some new ideas, even if it comes from an outsider.

    Supporters of Lindner will point to the fact that he added $17 million to the payroll this off-season. Great, but on what? Half of the $17 million went to gopher-ball machine Eric Milton. Most of the rest was spent on raises to Adam Dunn, Austin Kearns, D'Angelo Jimenez and Paul Wilson--worthwhile investments, but more on the order of basic roster maintenance than upgrading the team. Those moves aside, the only significant signing made by the Reds was Joe Randa, who's a decent place-holder until Edwin Encarnacion comes of age. The multiple moves made to supposedly bolster the bullpen amount to much ado over Stormy Weathers. To say that Lindner opened his wallet to make major improvements is untrue.

    Looking back on Lindner's history, his resume is less than impressive. He handed Barry Larkin a ridiculous contract in 2000. Giving an aging shortstop with declining skills a $27 million dollar contract is a mistake few franchises can afford, much less the smaller-market Reds. The 2001 draft was also a disaster, when the Reds drafted LHP Jeremy Sowers even though they knew they couldn't meet his bonus demands. The Reds took a bigger hit when rumors circulated that they purposely drafted Sowers because they were over budget and couldn't afford to sign any first-round draft picks. Sowers was taken sixth in last year's draft by the Indians and is expected to make his major league debut as early as 2006.

    Lindner's efforts to maintain local ownership are noble. Nevertheless, a shakeup in ownership could hardly be the worst thing for the Reds. Look no further than NL Central rival Milwaukee and the momentum shift since Mark Attanasio has purchased the club. The Brewers have had a good off-season largely because of Attanasio's willingness to give General Manager Doug Melvin some payroll flexibility. What gets overlooked in the ownership change is the way the team has marketed itself. The Brewers are currently doing something the Reds should be doing, taking a more aggressive marketing approach instead of living off what remaining lure Great American Ballpark still provides.

    The Reds have hired Allen & Co., the same firm that executed the sale of the Brewers. Reds fans should hope that the company is able to lure in another young, aggressive magnate to guide the franchise into the future.

San Diego Padres

  • Paying for Peavy: On March 5, the Padres gave pitcher Jake Peavy a four-year, $14.5 million contract, with an $8 million option club option for 2009, Peavy's first year of free agency. In total, the contract could be worth $26 million. Peavy is the second pitcher of the off-season, along with Johan Santana, to get an extension following a breakout season as a way to buy out potentially pricey arbitration years.

    The fact that the Twins and Padres made such moves should be of no surprise. Four front-line pitchers were recently been bought out of arbitration, prior to this off-season: the Big Three of Tim Hudson, Mark Mulder, and Barry Zito along with the Indians' C.C. Sabathia. These contract extensions are a clear effort by middle-market clubs to achieve some cost certainty and to avoid getting slammed in arbitration. In return for cost certainty, the player receives a nice chunk of guaranteed money, with the team assuming added injury risk. Using Support Neutral Lineup-adjusted Value Added, which determines how many wins above average a pitcher contributed, let's look at these contracts individually.

  • Tim Hudson: Signed a four-year, $9 million contract in August of 2000.
    Year  SNLVAR   Rank
    1999    4.9     37
    2000    5.9     21
    
    2001    6.8     12
    2002    7.8      5
    2003    8.5      1
    2004    5       30
    
    Hudson was able to rank in the top 40 the year before he got his extension despite only pitching 136 innings. He then went on a run in which he broke 200 innings from 2000-2003, logging 240 innings in 2003. Not only did Billy Beane get great value for the money (39 wins over the life of the deal), he was able to use Hudson in a trade to retool his roster.

  • Mark Mulder: Signed a four-year, 14.2 million contract in September of 2001.
    Year  SNLVAR   Rank
    2000    2.7     98
    2001    7.6      6
    
    2002    5.9     18
    2003    6.6     11
    2004    4.6     36
    
    Hard to argue with this contract either. Mulder was a bit more expensive and a little less productive than Hudson, but the deal worked out well given Mulder's production. As with Hudson, Beane traded Mulder at the most expensive point of his contract to help retool the A's roster.

  • Barry Zito: Signed a four-year, $9.3 million contract in 2002.
    Year  SNLVAR   Rank
    2001    6.6     16
    
    2002    8.5      3
    2003    6.7     10
    2004    4.6     36
    
    Zito's contract is highlighted by his 2002 season, when he narrowly defeated Pedro Martinez to win the AL CY Young award. While Zito came back down to earth last year, his strikeout rate improved, making him a good candidate to bounce back in 2005.

  • C.C. Sabathia: Signed a four-year, $9.5 million contract in 2002.
    Year  SNLVAR   Rank
    2001    4.3     33
    
    2002    3.9     53
    2003    4.9     34
    2004    4.7     35
    
    Sabathia has managed to defy much of what we know about the injury nexus for pitchers. Despite a slightly questionable usage pattern, he's stayed relatively healthy and productive--though not dominant--during his contract. The next few years are crucial for the Indians and Sabathia, as the team looks poised to contend, and Sabathia's contract becomes more expensive.

All of this brings us to Peavy, who had a very strong year in '04. Despite pitching in only 166.3 innings last year because of an inflamed elbow which kept him out for six weeks, Peavy ranked 13th in SNVA last-season, giving the Padres 6.5 wins. Also encouraging was his declining walk rate (2.6 free-passes per nine IP) and his improved strikeout rate (7.8 Ks per nine IP). Despite giving Peavy a yellow light, he has significant upside.

BP's PECOTA projection system sees another solid season from Peavy and expects him to maintain an EqERA (ERA adjusted to account for pitcher-friendly Petco Park, among other factors) of around 4 throughout the life of the contact. Considering the obscene amount of money being thrown at back-of-the-rotation guys, Peavy could be a steal.

Given the history of buying out the arbitration years of young pitchers, it seems advisable for the club to do so if the dollar amount is palatable. What risk the club takes on in the form of potential injury is often muted by the cost certainty obtained from avoiding arbitration. In particular, middle- to small-market teams can ill afford to be stuck paying a huge arbitration number after a breakout season.

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Premium Article Doctoring The Numbers:... (03/17)
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